This month’s prize for foolishness, for inadvertently trashing his own shares, goes to Mike Farley, chief executive of housebuilder Persimmon (LSE: PSN). “The key constraint to volumes” he explained, “is only being able to sell to credit-worthy customers with very large deposits.”
So what would you prefer, Mike? Selling homes to non credit-worthy customers, who can only put up a very small deposit? I guess the answer must be yes.
To be fair, Farley is not alone in blaming the lack of mortgage finance for the travails of the house building industry. Neither is he alone in pleading for a return to the good old days when any Tom, Dick or Harry could falsify their income, put up a minimal deposit – if any at all – and move into a home that they could not afford.
But still, the fact of building chiefs living in cloud cuckoo land is just one of several reasons to give property assets a wide berth.Wherever I look the prospects for property are grim. Let us take housing first. There are two reasons why house prices won’t rise…
Two reasons why house prices can’t keep rising
The first reason is that the banks and building societies have finally come to their senses and stopped making loans that will not be repaid. Conceivably there will be another free-for-all upswing one day, when all the golden rules of banking will be forgotten again. But I would not bet on it any time soon. The scars of this recession will not quickly be forgotten.
And there is one other negative factor often overlooked. Last year the average deposit paid by a first-time buyer was £29,000. Where did most of this money come from? Mum and dad.
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But, unfortunately for first time buyers, mum and dad are living longer and longer. They are enjoying a busy, leisurely and frankly expensive retirement while they can. They’re doing this before they end up in a care home where they will be depleting the family fortunes at a rate of about £30,000 per year. I just don’t see how it is possible for people to live longer without being left with less to hand down to the next generation.
So what about commercial property? Just look around you. On every high street there are empty units. Previously these were occupied by tenants paying an annual rent of, shall we say, £20,000 per year. On that basis the property was valued at perhaps £200,000. But retailers simply cannot pay that level of rent any more and still make a living.
If you were the landlord what would you do? Insist upon £20,000 and have the unit standing empty for months? Or accept £15,000? Of course the latter – even that means that a property that he previously claimed was worth £200,000 is suddenly worth £150,000.
For sure, rents are failing on the high street. And things are little better in the commercial and office sectors. Here the outlook is tied to the performance of the UK economy.
Since this country is spending £170bn more than it earns and can still barely get the economy into forward gear, what chance is there for growth here?
Apart from the ever-optimistic estate agents, there are only two groups of people expressing enthusiasm for property.
The vultures move in on the property sector
The first want to sell new property funds to anyone who can be persuaded that an upswing is just around the corner. And the second group, of so-called ‘vultures’, want to buy property on the cheap from distressed sellers.
The trouble is that the banks are not playing ball. It refuses to accept the sale of a property that would reveal the overvaluation of all the others it owns. It would rather maintain the pretence that these assets actually have the value shown on its balance sheet.
The bear market in property is going to be long and painful. Peter Hagerty is Chairman of AIM-listed property specialist Arteon (LSE: ARTO). This company has created a platform to enable investors to target their investment into specific properties. This is what he has to say.
“During 2009, investment property markets have displayed conflicting signals beneath a veneer of headlines which focussed on the slightest evidence of recovery… With a significant volume of property lending due to roll over within the next 24 months and great uncertainty in domestic economies… opportunities will be more plentiful in the coming times.”
In other words, prices will fall. Property has outperformed shares in the last decade. But don’t bet on a repeat in the next ten years.
• This article was written by Tom Bulford, and is taken from his free twice-weekly email the Penny Sleuth